As petrol/diesel prices are skyrocketing, many of us wonder what is causing the price surge and how the petrol pricing is done.

Petrol prices in India just broke its previous record high and touched the marks of Rs 88.12 per litre in Mumbai today on September 10, 2018. The price of petrol in Delhi is currently Rs 80.73 per litre and that of diesel is Rs 72.83 per litre. Price of Diesel in Mumbai is currently 77.32 per litre.

Opposition parties are unitedly protesting the rise in fuel prices and participating in the nationwide shutdown which was called by the Congress last week. The peculiar thing about the price hike is that the countries which buy petrol from India are selling it at a price lower than India.

Petrol Prices in neighbouring countries

Prices on May 1, 2018

Why prices are so high in India

Although the crude oil prices are at $70 per barrel as opposed to $107 per barrel in 2013-14, the petrol prices are at all-time high.

Prices of petrol and diesel in India have witnessed a steady increase in the past four years as the government has hiked excise duties on fuels a dozen times in this period. As a result, the Narendra Modi-led NDA government gets Rs 10 per litre excise duty more on petrol than what the Manmohan Singh-led UPA government got in 2014.

For diesel, the government gets almost Rs 11 per litre more than the previous government. Excise duty on petrol has gone up by 105.49 per cent (including the only time when duties were cut by Rs 2 per litre last October in the run-up to the assembly elections in Gujarat), while on diesel it has shot up by over 240 per cent during the time.

Currently, diesel is taxed at 66.82 per cent but UPA collected 22.5 per cent tax back in FY2014.

Aside from slight variations in the price due to currency exchange rates and other international reasons, what is creating a gigantic wall of difference in fuel prices before and after 2013-14 are the increased rates of excise duty imposed by the government.

Fuel taxes and how the petrol prices are calculated

While pretty much everything in the country is under GST, fuel prices are another story. Currently, the petrol prices are structured by the excise duty + VAT. While the excise duty is collected by the central government, the VAT goes to the state government's revenue.

The price of the petrol and diesel is the sum of excise duty, VAT, the price to dealers and the commission pocketed by dealers.

The proportion of taxes as a component of the prices

If we look at the excise duty and VAT as a percentage of the retail price, we are presented with shocking figures.

While diesel is taxed at more than 66 per cent of the retail value, petrol is taxed over 100 per cent.

Break up of tax on petrol

Fuel prices under GST

If petrol and diesel were to brought under GST, the prices would fall dramatically. Even under 28 per cent tax slab under GST, the petrol would cost only Rs 48.59 per litre and diesel would cost Rs 50.41 per litre.